RCS Creditor Trust v. Schorsch et al., C.A. No: 2017-0178-SG (Del. Ch. Mar. 18, 2021)
Controlling shareholders of a Delaware corporation owe fiduciaries duties, but those duties do not require controllers to sacrifice contract rights or to vote altruistically. In the Court of Chancery’s recent decision in RCS Creditor Trust v. Schorsch et al., the Court affirmed this proposition, holding that where a special committee and its review process were otherwise independent, a controlling shareholder did not breach his fiduciary duties or improperly influence the committee by sharing how he planned to vote in connection with two proposed, competing transactions.
RCS Capital Corporation (“RCS”) was a real estate investment trust servicing company in need of an equity infusion. To help resolve these liquidity problems, a potential transaction involving Apollo Global Management, LLC and AR Capital, LLC, (the “Apollo Transaction”) was presented to RCS’s Board. Because Apollo was affiliated with RCS’s controller, Nicholas Schorsch, a special committee was formed to review the transaction. During the special committee process, an alternative to the Apollo Transaction arose involving Centerbridge Capital Partners III, L.P (the “Centerbridge Proposal”). The Centerbridge Proposal included terms unfavorable to Schorsch, including the loss of his controller status through a surrender of his preferred voting shares. Schorsch informed the special committee that he did not support the Centerbridge Proposal. Ultimately, in part because Schorsch’s continued opposition made the Centerbridge Proposal infeasible, the special committee recommended pursuing the Apollo Transaction.
The Apollo Transaction fell through and, after a series of other mishaps, RCS went bankrupt. A creditor trust was formed which brought claims against Schorsch and certain affiliates, including claims related to the failed Centerbridge Proposal. Plaintiffs alleged that Schorsch acted to quash the Centerbridge deal in breach of his fiduciary duties. But the facts did not bear this out by the summary judgement stage. According to the Court, the evidence supported that the special committee acted independently and that Schorsch had done nothing more than inform the committee of how he would exercise his shareholder vote. Doing so did not breach his fiduciary duties as a controller. Like any shareholder, Schorsch had the right to vote and his status as a controller did not require him to sacrifice this right.